Public vs Private Markets During Times of Unrest

An Open Letter by our Head of Wealth Management, Reza Jafer, CFA

It should be no surprise that we’ve been receiving several calls from investors asking about the potential impacts of Coronavirus on their Lending Loop portfolios. So I wanted to share some of my thoughts about the current state of the market.

For starters, last week alone fear of a global economic slowdown saw stock markets fall remarkably, erasing a large portion of the 2020 gains and starting to reverse last year’s tremendous upswing:

Source: Yahoo! Finance, March 3, 2020

The chart below also tracks the CBOE Volatility Index (VIX), which is a popular measure of the stock market’s expectation of volatility:

Source: Yahoo! Finance, February 27, 2020

Above you can visually see the recent spike of investor fears and the panic that has overtaken the markets in 2020. This single concept of volatility is what keeps so many people up at night.

I’m sure you’ve heard financial experts talking about staying calm and focusing on long-term financial goals, but we understand that it is hard in practicality and why we are firm advocates for diversifying with low correlation private market investments.

In an ever more globalized world, investing in small businesses can be a tremendous diversifier due to the hyper-localization of their customers and suppliers. For example, a restaurant in Manitoba relies heavily on its customers within a 10 km radius for its business and is quite disconnected from global supply chains and far-reaching pandemics. Of course, this can change if they cannot source ingredients or if their customers are too scared to visit their establishments. A small nimble business can make decisions and quickly implement actions to address the issue. Additionally, Lending Loop can monitor their sales to see first hand if there is any cause for concern on missing payments.

So, what does all of this mean?

Investing in private markets such as Lending Loop can significantly reduce the effects of perception, market chatter, sentiment, and panic selling from the equation as we only focus on important fundamentals and how your investments are actually performing (i.e. are the businesses you have lent to paying you back?). As an added benefit, lending to small businesses has historically demonstrated low correlation to traditional public equity and bond markets while offering enhanced return potential.

By investing in small businesses through Lending Loop, you are supporting the “real economy” which makes up approximately 70% of the private workforce and contributes almost 42% to the Canadian GDP. (https://www.ic.gc.ca/eic/site/061.nsf/eng/h_03090.html).

As you are considering alternative investments or if you would like to review your Lending Loop investment strategy, please feel free to contact us for additional information.